Bond ETFs: Winds of Change Begin to Swirl

On 10/8/09, something was lost in the excitement of a deteriorating U.S. dollar and a profitable Alcoa (AA). Specifically, auction participants balked at the issuance of new 30-year U.S. Treasury Bonds at 4.0%.

(In truth, I am surprised that investors would want 30-years at 5.0%. After all, it’s nearly impossible to believe that long maturity date treasuries can be kept at rock bottom lows for much longer.)

Here’s the most striking part. Interest in shorting U.S. Treasury Bonds more than doubled on the news. Volume on the ProShares UltraShort 20+ U.S. Treasury (TBT) traded in excess of 12,500,000 shares, far exceeding the 5-6 million that one expects.

There are only a handful of times in TBT’s history that volume was this heavy. On most of those occasions… U.S. government bonds sailed in a new direction.

How will other bonds be affected? If yesterday is any indication, U.S. investment-grade bonds may also struggle. However, as long as the U.S. dollar is falling, foreign bonds keep shining.

Popular Bond ETFs During An Unpopular Auction For 30-Year U.S. Treasuries
						10/8/2009
ProShares UltraShort 20+ U.S. Treasuries (TBT)						2.18%
Templeton Global Income (GIM)						1.28%
ProShares UltraShort 7-10 U.S. Treasuries (PST)						0.84%
SPDR International Treasury (BWX)						0.83%
iShares JP Morgan Emerging Market Bond (EMB)						0.37%
iShares Aggregate Bond (AGG)						-0.07%
iShares TIPS Bond (TIP)						-0.10%
iShares 7-10 U.S. Treasury Bond (IEF)						-0.37%
iShares Investment Grade Bond (LQD)						-0.56%
iShares 20+ U.S. Treasury Bond (TLT)						-1.05%

Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.

Comments

[Emerald:]

A year ago, many investors rushed to short the long Treasury and got crushed. We are in a deflationary environment with the consumer tapped out and businesses not looking to borrow. I'm in intermediate corporates, governments and munis, but not shorting.

Oct 09 11:39 AM

[PharmBoy:]

I've been long TBT for a couple of weeks. A little early but this is one leveraged ETF that is actually worth holding onto for the intermediate term without fear of being crushed (ala SKF)...this is going to 50 in a hurry, long treasuries doesn't seem to be the trade going forward.

Oct 09 11:42 PM